Brexit and the City: From Big Bang to Brexit
Posted by hkarner - 31. Oktober 2016
Source: The Economist
The financial-services industry considers its future outside the European Union
THE City of London is fretting about Brexit, especially about talk of a “hard Brexit” that takes Britain out of the European Union’s single market. That raises doubts about the future of passporting, which allows financial-services providers to trade across the EU without separate regulatory or capital requirements. Another concern is that the government’s plan to start the formal process for Brexit by the end of March will mean that Britain may be out of the EU as early as 2019, yet banks must plan two or three years ahead. Hence the latest warning from Anthony Browne, chief executive of the British Bankers’ Association, that banks may start shifting jobs to Europe early next year.
It is a nice irony that such jumpiness should coincide with this week’s 30th anniversary of Big Bang, the deregulatory step that largely created today’s City (hugely helped by the expansion of Canary Wharf). Before Big Bang, says one financier, the City was backward and parochial, and there were real fears that it might lose out not just to New York but to continental Europe. It was Big Bang that underpinned London’s dominance of European finance. And it is Brexit that may now challenge it.
There is no disputing the importance of financial services to the British economy. TheCityUK, a lobby group, says 1.1m people work directly in the business, rising to 2.2m if jobs in supporting infrastructure are included. Two-thirds of them are outside London. Financial services contribute some 12% of the national tax take. Banking is the country’s biggest single export. Financial and related services generate an annual trade surplus of £55bn ($67bn).
Yet many Brexiteers are unfazed by bankers’ threats to decamp. They say that as finance goes global, passporting will no longer matter. Nowhere else in Europe could replicate London, whose competitors are New York, Singapore and Hong Kong. The City expressed similar fears of job losses after Britain’s decision not to join the euro, which proved empty. And they argue that London is a huge asset for the EU, not just Britain; European companies and banks need it, so their politicians will not damage it.
This seems complacent to those working in the City. Take passporting. There are many kinds of passport, from asset management to insurance to banking. For some sectors, like hedge funds and general insurance, passporting may not matter much. But as a report from Open Europe, a think-tank, notes, it is critical for investment banking. Some banks are established in more than one place already: Citibank has a separately capitalised subsidiary in Dublin. But most are not. The EU accounts for a fifth of their business; if they lose the passport, they must set up elsewhere (estate agents already report inquiries about space in Frankfurt). That could cost billions, when profit margins are tiny.
As for claims that nowhere else can compete, London will surely remain Europe’s biggest financial centre. But finance is not static. Young people in the fast-expanding “fintech” business could shift almost anywhere. There are many rival places for financial services to go, from Frankfurt to Amsterdam to outside Europe. Morgan Stanley’s first overseas office was in Paris, not London. JPMorgan Chase has warned that Brexit might lead to 4,000 job losses; HSBC has talked of transferring 1,000 staff to Paris. Oliver Wyman, a consultancy, estimates in a report prepared for TheCityUK that a hard Brexit could immediately cost as many as 75,000 jobs in all, a significant hit. Mark Boleat of the Corporation of London reckons a third of lost jobs might go to the continent, a third to New York—and the rest could just disappear.
Nor is there much sign of other countries backing the City. The financial-services industry is hardly popular across Europe, where it is widely blamed for the financial crisis. Other governments itch to pinch parts of London’s business. Clearing and settlement is a prime example. London handles the bulk of clearing of trades in euros, but the European Central Bank has long wanted to repatriate this to Frankfurt. An earlier attempt was rebuffed by the European Court of Justice, but Brexit may deprive London of judicial protection. Profits from clearing matter a lot to the London Stock Exchange.
Are there alternatives to passporting? Some have suggested relying on regulatory equivalence or mutual recognition. The argument is that post-Brexit Britain starts with the same rules as the EU, so regulators should give banks the same freedom. But this would work only if Britain follows all future EU regulations despite having no say in them—and Brexiteers are keen to tear up red tape, starting with the EU’s foolish cap on bank bonuses.
Migration is another worry. The industry needs to hire staff from the rest of Europe at short notice, yet Brexiteers want to introduce work permits or visas. A report by PwC, a consultancy, for the Corporation of London floats the idea of regional visas for London alone. Yet it is hard to see a carve-out for the City from broader controls, just as it is hard to imagine a deal that gives it alone full access to the EU’s single market (and bankers snort at any notion that they might pay for the privilege).
Grim noises from the City may be partly designed just to shock pro-Brexit ministers. But bankers are deadly serious over needing clarity about post-2019 transitional arrangements if they are not to start shifting jobs abroad soon. Their big hope is that Philip Hammond, the chancellor, makes continuation of the banking passport in some form his priority for Brexit negotiations. But they are not sanguine.